The services sector witnessed a moderation in June as the pace of growth in new orders placed at private sector firms was the weakest in the last 50-month period, HSBC said
Output of the country’s services sector slowed down in June due to a decline in new business orders and subdued economic conditions, an HSBC survey showed.
The HSBC/Markit purchasing managers’ index for the services industry, which was released today, fell from May’s three-month high of 53.6 to 51.7 in June.
The services sector, which accounts for around 60% of India’s GDP, witnessed a moderation in June as the pace of growth in new orders placed at private sector firms was the weakest in the last 50-month period, HSBC said.
Moreover, subdued economic conditions were also a major factor behind the deceleration in output growth, HSBC said.
A reading above 50 shows that the sector is expanding, while that below 50 shows that the output in the sector is contracting.
“Service sector activity grew at a slower clip as new business flows moderated, which made businesses less optimistic about the year ahead,” HSBC chief economist for India and ASEAN Leif Eskesen said.
The slower pace of growth in the services sector is reflected in service providers’ subdued optimism towards output growth in the next 12 months.
Earlier this week, the HSBC/Markit manufacturing PMI showed that the manufacturing sector output remained broadly flat in June as new orders declined for the first time in over four years.
Accordingly, the HSBC India Composite Output Index, which maps services and manufacturing activity, fell from 52 in May to 50.9 in June.
“Notwithstanding the slowdown, inflation readings firmed (up) on the back of higher labour and raw material prices, with the depreciation of the rupee also cited as a factor,” Eskesen said.
The rupee last week sank to an all-time low of 60.76 against the dollar on heavy capital outflows and month-end dollar demand from importers.
This is the first time since 27th June that the domestic currency has fallen below the 60 level
The rupee on Wednesday fell by 37 paise to again slip below the 60 mark to 60.03 against the dollar in early trade at the Interbank Foreign Exchange market, on heavy dollar demand tracking strengthening of the US currency overseas.
This is the first time since 27th June that the domestic currency has fallen below the 60 level. The rupee had touched an all-time low of 60.76 against the dollar on 26th June.
Forex dealers said besides dollar gaining against other currencies to trade at nearly one-month high in the global markets on strong economic data, a lower opening of the domestic equity market also put pressure on the rupee.
The rupee had depreciated by 14 paise to close at 59.66 against the dollar yesterday on defence-related dollar demand losses in the local stock market.
Meanwhile, the BSE benchmark Sensex fell by 211.54 points, or 1.09%, to 19,252.19 in early trade today.
In January 2008 the dollar fetched Rs39.27 and now it is hovering around Rs60, thus losing about 34% of its value. Due to the practically free import policy, relatively free and unrestricted travel abroad, billions of dollars are being utilized, leading to deficits
It is true that Benjamin (Ben) Bernanke, chairman of the US Federal Reserve, caused a worldwide monetary tumble by slowing down the bond buying programme, which in all possibility may come to an end by the close of the year.
This simple indication has resulted in the dollar strengthening against major world currencies. Since April this year, except for the British pound and the Chinese Renminbi (Yuan, as it is popularly known), a number of currencies such as the Brazilian Real, Rand, Indian Rupee, Mexican and Philippines Pesos, Russian Rouble, Turkish Lira, Indonesian Rupiah, the Malaysian Ringgit, Thai Baht, South Korean Won and the Euro fell by various percentages. The lowest was the Euro at 0.15% while the South African Rand fell by 13.99%.
Each country has its own domestic reasons and relatively poor export performance may have caused this fall apart from the issue of GDP and the rest, but the very fact that the US may have to slow down the bond buying may have additionally precipitated this fall!
This is an extremely difficult and unpredictable subject to handle and fathom, as so many factors play a role in the process.
As far as the Indian rupee is concerned, first and foremost is the crossing of the Rs60 barrier that had somehow held up for more than two years. And a few days ago, it crossed this threshold.
It may be recalled that in January 2008 the dollar fetched Rs39.27 and now it is hovering around Rs60, thus losing about 34% of its value. Exporters are happy for this windfall gain, but, the importers have to pay so much more to get their goods.
Is this depreciation of the rupee a temporary phenomenon, or is it likely to slide further down to Rs62-Rs65 range? And, will it stop there and what are the chances for recovery? Very difficult to say and even more difficult to predict!
And what should the government do, what role can the Reserve Bank of India (RBI) play effectively to stop this fall?
The first is the international repercussion due to the worldwide reaction to the Federal Reserve’s move. On this, none but the US has the control.
Second is the peculiar situation of black market trade that is highly prevalent in the rupee exchange rate due to the ‘hawala’ transactions. As we write this, it has come to light that four trucks carrying money, jewellery, etc from Mumbai to Gujarat were caught with some Rs200 crore worth of these materials, said to be for settlement of ‘hawala’ transactions, and the investigation is still going on. This racket is several decades old and in spite of various attempts, there appears to be no end in sight.
The third important factor is that billions of dollars are remitted back to India every month by the expatriate Indian population working abroad, particularly in the Middle East. No doubt there is substantial transaction of this expatriate wealth that takes the ‘hawala’ route!
Fourth is the huge amount of money that has been stashed away in Switzerland and other countries on which the government has the relevant information, but for reasons known to it, is not making the details pubic. This lot, of course, has escaped the tax net of the government and generally classified as “black money” abroad on which discussions have been going on for years. It is a separate issue that such large sums of unaccounted, un-taxed money, also known as black money is within the country, running a parallel economy.
Finally, due to the practically free import policy, relatively free and unrestricted travel abroad, billions of dollars are being utilized, leading to deficits. In fact, today, our foreign exchange reserves are now roughly 15% of the GDP, which is one of the lowest in the region.
And, on the top of all these not-too-rosy conditions, general elections are only a few months away.
With all these in the background, what are the steps that can be taken to protect the rupee? Here are some suggestions for the government:
a) Consider seriously establishing two rates of exchange for the rupee against the major currencies
b) instead of allowing the rupee to float, officially devalue the currency and fix a realistic price of exchange. The real value of the rupee may be pegged at about Rs63 to a dollar
c) this is probably the going rate for ‘hawala’ transactions; such a rate may help to eliminate the ‘hawala’ system altogether
d) encourage expatriate Indians working (and living permanently abroad) to remit funds through banking channels
e) such NRI/OCI remittances be given an additional rate of interest benefit, if the FDRs are for three years or more
f) discourage and restrict items of imports that are easily obtainable from indigenous sources; all such finished goods, if imported, will have to pay a penal rate of import duty over and above existing levels; all items under ‘OGL’ need to be reviewed and curtailed where possible
g) all imports of essential raw materials, capital goods and maintenance spares, obtained under export incentive replenishment licenses, like the erstwhile schemes, will have a lower exchange rate so as to encourage exports, which will earn higher rupee rates
Unless the government takes serious steps, including the total ban of reckless import of gold, the rupee is heading for a further fall.
(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)